Foreign Direct Investment (FDI)

Purchase of physical assets or a significant amount of

ownership (stock) of a company in another geography in

order to gain a measure of management control.

Types of FDI

1. Greenfield Investment

2. Mergers and Acquisitions

Greenfield Investment:

It is the direct investment in new facilities or

the expansion of existing facilities. It is the

principal mode of investing in developing

countries.

Mergers and Acquisition:

It occurs when a transfer of existing assets from

local firms takes place.

Advantages of FDI (Firm’s Point of View)

Gain a foothold in a new geographic market

Increase a firm’s global competitiveness and

positioning

Fill gaps in a company’s product lines in a global

industry

Reduce costs in such areas as R&D, production, and

distribution

Advantages of FDI (Host Country’s Point of View)

Inflow of equipment

Transfer of technology

Scarce human capital

Financial resources

Incentives To Attract Foreign Firms

Fiscal Incentives

Financial Incentives

Other Incentives

Fiscal incentives:

Tax rebate and holidays

Various export and import based incentives

Losses against future profits

Accelerated capital depreciation

Import based incentives: Duty exemptions; tax credits

(on materials)

Financial Incentives:

Direct subsidies and subsidized loans,

Loan guarantees

Guaranteed export credits

Low rates of Government insurance

Other Incentives:

Low cost and qualified labour

Natural resources

Political and economic stability

Long term market potential

Is FDI always Good?

Problem of Adverse Selection

FD Investors may tend to retain only High

Productivity Firms

Problem of Excessive Leverage

FDI in developing countries – The Future

Size of Local Markets will loose relevance

Shift from Market-Seeking FDI to

Efficiency-Seeking FDI

Policies should not be discriminatory

FDI in India – The Story so far

2nd most attractive destination – AT Kearney

Index

2nd most attractive investment destination

among transnational corporations – UNCTAD’s

‘World Investment report’

Most attractive location for off-shoring of

services activities – AT Kearney Global Services

location Index

FDI in India – FDI prohibited

Retail Trading (Except single brand)

Atomic Energy

Lottery Business

Gambling and Betting sector

FDI in India – FDI up to 26%

Broadcasting – FM radio, TV channel

Print Media

Defence Industries

Insurance

Petroleum and Natural Gas Sector

FDI in India – FDI upto 49%

Broadcasting – Hardware facilities, Cable

Network, DTH

Domestic Airlines and Air Transport Services

Telecommunication Services – basic & cellular

(over 49 and up to 79% require FIBP approval)

Infrastructure

Asset reconstruction

FDI in India – FDI up to 74%

Development of existing airports

ISPs

Establishment and operation of satellites

Atomic Minerals

Private Sector banks

Single Brand retailing

FDI in India – FDI upto 100%

Greenfield Airports

Mining of coal and lignite

Petroleum Sector – Market Study and formulation

Courier services

Tea Sector

Non banking finance corporations

Domestic Airlines

Power Trading

Cigarettes

Alcohol

ConclusionFDI is a major source of technology transfer in a developing

country. Besides this, it gives boost to infrastructural and sectoral

developments. It creates employment and increases in

competition in market. It helps a country grow potentially and at

a faster pace. Many countries (mainly China and India) have

observed the positive effects of FDIs in the recent times. Major

concern are the policies which will help in attracting more

investments. Hence a country should keep in mind all the pros

and cons of FDIs while deciding the policies, which will end up

in country’s future growth. As rightly said by Sh. Kamal Nath

(Minister of Commerce and Industry, Govt. of India)……

THANK YOU